Abstract
This paper models the dynamics of adjustment to long-run purchasing power parity (PPP) over the post-Bretton Woods period in a nonlinear framework consistent with the presence of frictions in international trade. We estimate exponential smooth transition autoregressive (ESTAR) models of deviations from PPP, which are obtained using the Johansen cointegration method, for both consumer price index (CPI) and wholesale price index (WPI) based measures and a broad set of US trading partners. In several cases, we find clear evidence of a mean-reverting dynamic process for sizable deviations from PPP, with the equilibrium tendency varying nonlinearly with the magnitude of disequilibrium. Analysis of impulse response functions also supports a nonlinear dynamic structure, but convergence to long-run PPP in the post-Bretton Woods era is very slow.
Original language | American English |
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Pages (from-to) | 379-399 |
Number of pages | 21 |
Journal | Journal of International Money and Finance |
Volume | 20 |
Issue number | 3 |
DOIs | |
State | Published - Jun 2001 |
Scopus Subject Areas
- Finance
- Economics and Econometrics
Disciplines
- Finance
Keywords
- Nonlinear adjustment
- Post-Bretton Woods Era
- Purchasing power parity
- C22
- ESTAR
- F32
- Cointegration